Petrobras Floatel Signals Output Goals at Risk: Corporate Brazil

In Brazil, platforms are registered as export items and they helped the government post a trade surplus in 2013. Photographer: Dado Galdieri/Bloomberg

Aug. 5 (Bloomberg) -- Petroleo Brasileiro SA’s chances of
meeting output targets for the first time in a decade are fading
as a rush to dispatch new oil platforms creates headaches miles
offshore.

A floating hotel anchored last month at its P-62 platform
symbolizes the state-run producer’s predicament. The so-called
floatel is housing hundreds of workers sent to fix the new unit
that’s already months behind schedule after a fire and emergency
maintenance. Other new platforms at the Roncador, Sapinhoa and
Lula Nordeste fields have reported safety breaches and equipment
delays from suppliers, slowing the output ramp-up.

Petrobras, as the top producer in waters deeper than 1,000
feet is known, is relying on platforms like P-62 to tap vast
offshore deposits after missing output targets for 10 straight
years. Last year, it said production would start increasing in
the fourth quarter as nine new platforms added a million barrels
a day capacity. Through June, it’s up 1.4 percent compared with
a 7.5 percent annual growth target.

“We are less optimistic with Petrobras’s production growth
this year,” Auro Rozenbaum, an analyst at the investment
banking unit of Banco Bradesco SA, said by telephone from Sao
Paulo. “It failed to boost output in the first four months of
the year due to maintenance and equipment delays, making the
target less reachable.”

Stock Rally

Petrobras said in an e-mailed reply to questions that 33
new wells will be connected in the second half at P-62 and
sister platform P-55, each with the capacity to lift 180,000
barrels a day. The company is sticking with its growth target.

“New production systems will go on stream in 2014 to
ensure sustained growth, as outlined in Petrobras’ 2014-2018
Business and Management Plan, which has set a 7.5 percent rise
by the end of 2014, with a margin of tolerance of one percentage
point upwards or downwards,” according to the Rio de Janeiro-based company’s May output report.

Petrobras, the worst performing stock in the past five
years among 15 peers tracked by Bloomberg, has rallied 14
percent this year through yesterday, more than double the 6.2
percent average gain among peers. Brent crude has lost 4.9
percent in 2014.

The stock rose 1.3 percent to close at 19.70 reais in Sao
Paulo today, the highest since July 30.

The extra yield, or spread, investors demand to own
Petrobras bonds due in 2023 rather than U.S. treasuries fell to
281 basis points from 301 basis points at the end of last year.
Brazil’s economic growth will slow to 1.3 percent this year
before quickening to 1.7 percent and 2.6 percent in the next two
years, respectively, according to estimates tracked by
Bloomberg.

Rush Job

Investors aren’t counting on Petrobras meeting its targets
this year, Eric Conrads, who helps oversee $500 million in Latin
American stocks as a money manager at ING Groep NV, said. The
stock has gained on speculation that October’s presidential
elections will herald more investor-friendly policies.

“I don’t think the market is expecting the company to meet
this guidance at all,” Conrads said by telephone from New York.
“Fundamentals have taken a back seat.”

A rush to get P-62 and other platforms on the ocean last
year contributed to delays, according to Jose Maria Rangel, a
union leader and former board member who visited the platform on
July 1 and said he witnessed difficulties connecting the 3rd of
24th wells. The company was also fixing equipment flaws and
preparing to receive the vessel full of workers, he said.

It took more than four months to pump the first barrel at
P-62, twice as long as initially planned. The floatel was leased
to finish installing equipment that should have been done before
it left shipyards, Rangel said by phone from Rio.

Trade Surplus

“The amount of repairs needed now aren’t small,” he said
by telephone. “They were having problems connecting wells on
both P-62 and P-55. Obviously if you have set backs this will
reflect on production results.”

In Brazil, platforms are registered as export items and
they helped the government post a trade surplus in 2013. The
company started operations at P-55 just an hour and a half
before the end of the year and sent P-62 offshore unfinished,
Rangel said. P-61 also departed shipyards on Dec.31 en route to
Campos Basin Papa Terra and missed a first-half production start
date given in a January statement. Both P-55 and FPSO Cidade de
Paraty at the Lula Nordeste field have suffered equipment
delays. The units can cost more than $1 billion each to build.

Petrobras said concluding work when platforms are en route
to fields is standard practice.

The company on July 19 shut Sapinhoa, Brazil’s seventh-biggest producing field, for six days to repair a natural gas
cooling unit, Petrobras said in a separate e-mailed response to
questions.

Target Jeopardized

Brazil’s Labor Ministry sanctioned the P-62 in March and
fined Petrobras for five irregularities, including flaws in the
gas-leak monitoring, fire fighting and alarm systems. The gas
infrastructure still hasn’t been cleared to operate, the
ministry said in an e-mailed response to Bloomberg. Officials
are now looking into sister platform P-55, already sanctioned by
the oil regulator for using inadequate equipment, it said.

Analysts from Banco Santander SA to Bradesco warn the
slower-than-forecast expansion so far is putting this year’s
goal at risk even though new wells and production vessels are
expected to accelerate growth in the second half.

Production was almost unchanged in the first four months of
the year and started rising in May when P-62 began extracting
crude from Roncador. In June, domestic output surpassed 2
million barrels a day, although it still trailed 2011 levels,
prompting Santander analysts to label the performance
disappointing.

Natural Decline

Output growth probably will be capped at 5 percent this
year because of project delays and natural decline rates at
mature fields it has been exploiting for decades, Bernardo
Wjuniski, an analyst at Medley Global Advisers, who does
research on Brazil’s oil industry, said by phone from Sao Paulo.

At best, Petrobras will add 200,000 barrels a day each year
on average, compared with about 300,000 in the company’s
business plan, Wjuniski said. Petrobras overestimates how fast
it will bring new fields on line and underestimates how much
output will fall at older fields with depleting reserves, he
said.

Bradesco cut its annual production growth estimate to 6.5
percent, the bottom end of the range forecast by Petrobras, from
8.5 percent.

The company’s decline rates are in line with international
levels, Jose Formigli, who heads exploration and production,
told reporters last month. Petrobras intends to double local
output to more than 4 million barrels a day by the end of the
decade.

‘Way Above’

Geology may help the company recover some of the losses, as
production in some pre-salt fields beat expectations. Two wells
at Sapinhoa are producing more than 30,000 barrels a day,
according to regulator ANP. Petrobras reached capacity at FPSO
Cidade de Sao Paulo with four wells compared with the six to
eight it had estimated.

“Put a time delay on their own assumptions for the new
projects, add all of the decline rates, and then you have a very
different picture of how much they can add year over year,”
Wjuniski said. “They are way, way above what I think they can
do.”